If beauty entrepreneurs are to be believed, virtually no one is building a brand to exit. Still, that doesn’t indicate they wouldn’t consider a lucrative deal should it be on the table, right? To situate themselves for the possibility that could happen, they have to construct their brands with financial fundamentals attractive to potential buyers.
In a LinkedIn post on Wednesday, Kiva Dickinson, founder and managing partner at Selva Ventures, a venture capital firm focused on early-stage consumer packaged goods brands with Cake, One Skin, Kinship and Crown Affair in its portfolio, delineated goals for those fundamentals in the current environment in which he points out “investors are no longer willing to fund the proverbial ‘bridge to nowhere’” and “emerging CPG brands are all being told to ‘get profitable.’”
In practice, Dickinson writes that the directive to “get profitable” is the equivalent of “control your destiny and be profitable at exit.” Below, for beauty entrepreneurs interested in controlling their destiny, we share Dickinson’s post, tweaked a bit for percentages specific to beauty and personal care rather than the full CPG universe, plus informative reactions from Dickinson’s LinkedIn followers.
“Here’s what a healthy beauty brand might look like at acquisition:
Line Item (% of net sales)
Gross Sales (115%)
Net Sales (100%)
Gross Margin (60%)
Sales & Marketing (30%)
G&A (15%)
EBITDA (15%)
CPG brands start to get acquirable at $50-100m in sales, so a fast growing brand won’t have the above %s in the early years
Don’t panic that your G&A is more than 10% of sales. The answer here is operating leverage: Costs that stay *relatively* fixed as you grow
Where brands get in trouble is assuming that gross margin and marketing will improve with scale, and spending accordingly
If gross margin is 30% it’s very hard to ever get it up to 45%
If marketing is 50% of sales it’s very hard to get it down to 25%
If your marketing % is higher than your gross margin % then profitability is impossible
This is why brands need to stay laser focused on gross margin and repeat purchase in the early days
Healthy gross margin is the ultimate cushion for EBITDA margin. High repeat purchase is the primary way to get marketing % down (retail velocity + organic/paid ratio both go up)
There’s no lucrative exits for subscale profitable brands that aren’t growing. ‘Get profitable’ doesn’t mean ‘stop growing’
Chart the path to profitability with these ratios in mind. Work backwards from a target P&L at exit and your strategic decisions today will be much clearer”
In reaction to Dickinson’s post, Luke Weston, co-CEO at artificial intelligence-powered skincare brand Proven, commented, “I always think the principle should be to have a gross margin above the norm for your category… so talk to people in the category and understand where you should be, and constantly work on improving your pricing, mix, and costs… L’Oreal gross margin is 72%… Colgate is 57%… P&G is 48%… Unilever is 40%.”
Charlean Gmunder, former COO of Blue Apron, chimed in, “I absolutely agree with the focus on high-repeat purchases. This can be challenging when some in the business look to the ‘sexiness’ of customer acquisition as opposed to the more mundane customer retention. It’s far less costly to keep a loyal customer than to get a new one.”
Rakesh Narayana, GM of Access VC, the venture capital arm of CPG conglomerate Reckitt, added, “The buyers (whether it be strategics or PE) will need to 10x the size of a $50M brand to see any meaningful returns to their own shareholders. Much better to build a financially sustainable company, with steady growth and improving EBITDA, vs. a yo-yo P&L. Ultimately, buyers want brands that don’t NEED to be sold to survive. They would rather buy brands that are thriving on their own and can be accelerated further.”
